RISK ASSESSMENT

South African growth is expected to remain very weakly positive in 2017. Agricultural activity, badly hit by drought in 2016, is showing some signs of improvement amid more favourable weather conditions. The Crop Estimates Committee forecasts a 93% increase for summer crops in 2017. Moreover, mining production, after a 5% decline in 2016, is rising again (+7.4% in Q1 2017). In addition to the favourable evolution of the mining output prices, this increase is expected to support mining and quarrying activities.

Nevertheless, albeit this recovery in the primary industries of the economy, the constraints on growth and uncertainties over the country's policies are still significant, however. Industrial production is jeopardized by the lack of competitiveness and persistent problems with electricity supply, despite the improvement observed since 2016. In the second half of 2017, the mining sector could be undermined by the introduction of a new mining charter stipulating, in particular, that a minimum of 30% of the capital of a company in the sector should be owned by black South African. Not only did this new legal framework provoke the wrath of the stakeholders in the sector, but it could also dissuade future investors. Household consumption, traditional driver of the economy, is expected to suffer from the historically high level of unemployment (27.7% in Q1 2017).

The credit rating agencies’ decision to downgrade South Africa into "speculative" category, following the dismissal of the Minister of Finance, is a further blow to the country's growth prospects. It nurtures the rand volatility, which should keep weighing on already morose household consumption. The proposed introduction of a national minimum wage, evoked for the second half of 2017, which might have favoured a renewal of private demand, should not be put in place before May 2018. Household and business confidence should therefore be eroded. Moreover, the deterioration in the "speculative" category also sends a negative signal to foreign investors.

The political uncertainty arising from the dismissal of the Minister of Finance, both for the ANC, which has been in power since the end of apartheid, and for the country, in recession after it recorded a second consecutive quarter of contraction in Q1 2017, weakens growth prospects. With low growth and inflation still in the upper band of the target rand set by the Central Bank (between 3% and 6%), stagflation looms in South Africa.

No room for manoeuvre in terms of budget and persistent current account deficit

Sanctioned by a credit rating downgrade, the South African government has paid its inability to bring its budget deficit under control and to stabilise its debt since the 2008/2009 crisis. The loss of its “investment grade” status entailed by this downgrade will also have a direct impact on interest rates and will increase the of debt servicing, which already accounted for a growing share of expenditure (11.2% of spending for fiscal year 2016/2017). In order to reduce the fiscal deficit, the budget for fiscal year 2017/2018, presented by Finance Minister Pravin Gordhan one month before being sacked, included a tax increase of 28 billion Rand (2 billions of dollars). The latter also announced the reduction of the expenditure ceiling of 10 billion rand. Despite the commitment of the new Finance Minister, Malusi Gigaba, to pursue the budget consolidation efforts of his predecessor, his task will be hampered by the weakness in economic activity. Indeed, the weak economic growth could limit government income, while current spending is likely to remain fairly stable and the government remains committed to the realisation of infrastructure projects.

The current account deficit is expected to stabilise in 2017. The increase in exports, dominated by mining products (particularly gold and platinum), is expected to be offset by imports value. Commodity prices, although more positively oriented than in recent years, are unlikely to increase greatly. Moreover, growth on South Africa's principal markets (China, EU), is expected to be moderate. With trade balance remaining broadly stable, net investment income payments to foreigners should remain the main contribution to the current account deficit.

A large current account deficit, uncertainties over economic and political development and the prospect of the rise in US interest rates, is likely to maintain the downward pressure on the rand in 2017. Capital inflows oscillations are expected to nurture the exchange rate volatility of the South African currency, which has already taken a hit from the loss of the “investment grade” status , especially as the central bank’s leeway for raising its key rate (7% since April 2016) is much reduced on account of the low growth rate.

The banking sector, well capitalised and little exposed to exchange rate risk, remains strong, with a low ratio of non-performing loans (around 3%). Credit risk could, nevertheless, increase in view of the impact of the economic slowdown on borrowers' creditworthiness. The credit rating downgrade, which was also applied to the 5 main banks of the country considering their systemic risk on the economy, could lead to a deterioration of their financial ratios.

Persistent political tensions and a degraded business climate

President Jacob Zuma’s authority, re-elected after the ANC’s comfortable victory in 2014, is contested as never before after he sacked his respected Finance Minister, Pravin Gordhan, in a controversial cabinet reshuffle. Main guarantor of fiscal discipline in the eyes of investors and international institutions, the latter was at odds with J. Zuma on probity since he was appointed in rocambolesque circumstances in December 2015, especially as allegations of misappropriation of public funds and collusion with the business community against the President are piling up. After he survived eight no-confidence vote, J. Zuma will, once again, confront his Parliament on August 8. Nevertheless, it will be the first one since the Supreme Court stated that such a vote could be held by secret ballot. If he manages to keep his majority united to save his position on this occasion, the President would remain in power, at least, until the ANC convention in December 2017, when his successor as head of the party will be appointed. Internal divisions worsened after his decision to sack Pravin Gordhan and could critically sap his authority on the ANC. Simultaneously, the persistent failure to respond to the people’s expectations on unemployment, poverty and corruption remains a source of social instability. Demonstrations, with tens of thousands taking to the streets to ask for J. Zuma resignation, highlights this rising political and social tensions.

Yet, South Africa’s performances are satisfactory according to the World Bank’s governance indicators, but are on a deteriorating trend with regard the rule of law (86th in 2015, i.e. ten places lower in a year). Crime levels and corruption are also handicapping the business environment.